The Australian Dollar (AUD) rallied across major currency pairs on Wednesday, driven by a stronger-than-expected Consumer Price Index (CPI) print for July. The headline CPI rose 3.5% year-over-year, down from 3.8% in June but above the 3.3% market consensus, while the monthly CPI increased 1.0%, beating the 0.8% estimate. The trimmed mean CPI, a key measure for the Reserve Bank of Australia (RBA), held steady at 3.6% year-over-year, defying expectations for a slowdown [2][3][4].
This inflation surprise has sharply shifted market expectations for RBA policy. Deutsche Bank noted that traders increased the probability of a rate hike at the September 28-29 meeting from 10% to 32% following the data, and their Australian economist now expects a 25 basis point hike in September, reversing a prior call for a pause [3]. MUFG and ING analysts also highlighted that the RBA's August meeting minutes and the persistent trimmed mean inflation reinforce the risk of an earlier rate hike than markets had priced, with a full hike previously not expected until February 2027 [2][4].
The AUD/USD pair extended gains for a second day, trading around 0.7180, while AUD/JPY climbed to near 114.30, with the Australian Dollar outperforming most major currencies. The AUD was the strongest against the New Zealand Dollar and also posted gains against the US Dollar, Euro, and Japanese Yen [2][3][6]. However, some analysts cautioned that the AUD may be starting to look stretched after the recent rally [4].
Despite the AUD's strength, the upside could be capped as the US Dollar (USD) finds support ahead of the US Personal Consumption Expenditures (PCE) Price Index release, the Federal Reserve's preferred inflation gauge. ING analysts expect a benign core PCE print of 0.2% month-on-month to keep the Dollar steady, with the DXY likely capped at 99.00/10 and a possible drift back to 98.60 [1][6]. Market participants are also watching for signals from Fed Chair Kevin Warsh at the upcoming Jackson Hole symposium [2].
Broader market sentiment was buoyed by easing geopolitical tensions, as Iran and Oman discussed establishing a temporary joint maritime corridor in the Strait of Hormuz, contributing to an 8% drop in oil prices from last week's highs and reducing safe-haven demand for the USD [1][2][5][6].
CONCLUSION
Stronger-than-expected Australian inflation data has reignited expectations for a near-term RBA rate hike, propelling the AUD higher across major pairs. While the US Dollar remains steady ahead of key inflation data, the market is increasingly pricing in more aggressive RBA action, though some analysts warn the AUD's rally may be overextended. Easing geopolitical risks and falling oil prices are further supporting risk sentiment and weighing on safe-haven currencies.